Nearly 2% Of Global Crude Could Be Cash Negative at $40 Brent

Rig Zone ^ | January 09, 2015 | Karen Boman

[thackney]

A recent analysis by Wood Mackenzie found that 1.6 percent, or 1.5 million barrels of oil per day (MMbopd), of global oil supply could be cash negative on an operating basis if Brent crude falls to $40/barrel.

Wood Mackenzie’s analysis of 2,222 producing oil fields, which account for 75 million barrels per day of total liquids production, determined at three price points the impact on oil production and percentage of global supply which will turn cash negative.

The firm concluded that producers would begin shutting in production at $40/bbl Brent crude or lower, to a point where a significant reduction in global supply would result.

“The cash operating cost for oil fields becomes very important as prices producers can achieve for the oil they produce nears the marginal point,” said Robert Plummer, corporate research analyst for Wood Mackenzie, in a Jan. 9 press statement.

Production from U.S. onshore ultra-low production volume “stripper” wells could be the first to be halted. Approximately 1 MMbopd comes from these wells; many produce only a few barrels per day and have operating costs between $20 and $50.

“We believe that once the cost of collecting the oil from these wells becomes marginal, shut-ins are likely,” said Plummer.

At the $40/bbl price point, several Canadian oil sands projects are contributors to production. However, tight oil production only starts to become cash negative as Brent falls into the high $30s.

“Turning on and off bitumen production is a complex and lengthy process,” said Plummer. “Stopping the injection of steam into oil sand reservoirs would result in a long and expensive restart.”

Interestingly, a significant portion of oil sands operating costs is fuel for the extraction processes, so at low oil prices, operating costs may be lower than current levels, Plummer noted.

Wood Mackenzie also found that, at $50/bbl Brent, only 190,000 bpd of oil production, or .2 percent of world supply, is cash negative. Seventeen countries supply oil that is cash negative at $50; the main contributors are the United States and the United Kingdom. At $45, 400,000 bpd, or .4 percent of global supply, is cash negative. Half of this production comes from conventional U.S. onshore production.

Being cash negative – which means that the production is more costly than the price received – doesn’t necessarily mean that production will be stopped. Typically, producers will store oil to sell when the price recovers.

“For others, the decision to halt production is complex and raises further issues. Thus, there is no guarantee these volumes would be shut-in,” said Plummer.

Instead, operators may prefer to continue producing oil at a loss rather than stop production – especially for large projects such as oil sands and mature North Sea fields. In the North Sea, deciding to halt production from fields is often irreversible. Some platforms share their cost burden with other linked fields, and satellite fields are dependent on a mother platform.

“Consequently, the economics of a group of fields have to be considered,” said Plummer.

A company looking to reduce expenditure for the next two or three years may prefer to operate with a small loss versus decommissioning a field at the cost of hundreds of millions of dollars.

In Latin America, where a number of heavy oil projects become marginal at lower oil prices, governments dependent on these revenues may provide royalty relief to producers to maintain that production.

The slide in global crude production prices has prompted producers to cut capital expenditures and drilling plans, leaving many to wonder how low prices would go and if the Organization of Petroleum Exporting Countries (OPEC) would budge from their pledge not to cut production. Saudi Arabia and its Gulf OPEC allies haven’t shown any sign of considering a cut to boost oil prices, despite oil dipping below $50/barrel this week, Reuters reported Thursday. OPEC ministers and delegates have blamed non-OPEC producers such as Russia, Mexico and Kazakhstan, as well as U.S. shale and tight oil production, for the oversupply of oil in the world market.

[thackney]

Links to related information at the source

[thackney]

http://public.woodmac.com/public/views/low-oil-prices-halt-production

We conclude that only a Brent price of $40 a barrel or below would see producers shutting-in production at a level where there is a significant reduction in global oil supply.

However, there is no guarantee that these volumes would be shut-in. Operators may prefer to continue producing oil at a loss rather than stopping production altogether, especially for large projects such as the oil sands and mature fields in the North Sea.

The production most likely to be halted is from US onshore ultra-low output wells. Many produce only a few barrels per day and operating costs vary between $20 and $50. We believe that once the cost of collecting the oil from these wells becomes marginal, shut-ins are likely.

[cicero2k]

So the ceiling around $50. Above that, more production comes on-line and below, production is removed.

[meatloaf]

I’m curious how older natural gas wells might be effected. Ones that produce higher value liquids won’t be affected. The ones that only produce dry gas are the one’s I’m curious about.

[thackney]

I think, that a dry gas well, would have relatively low operation and maintenance cost, up to the point of needing compression to make withdraws. At that point, cost go up substantially.

[wolfman23601]

2%? Bring it on.

[thackney]

Keep in mind, it won’t be a 2% rise in price.

The price drop is from a less than 1% oversupply.

[ZULU]

So what? As soon as the price goes up again, the fracking and offshore opertations become profitable again. Goldman Sachs and the other international corporations which have been waxing rich on profits from oil will just have to deal with it

Payback is a b***h.

[thackney]

And so the roller-coaster ride will continue....

[Dalberg-Acton]

When I the phrase “cash negative”, I want to slap a fool.

[Dalberg-Acton]

“See the phrase”.
I can’t believe I didn’t see that I didn’t “see”!

[ckilmer]

I’ve been hearing growing talk that the bottom for oil prices is somewhere +-$35@barrel— or about where we talked about last year coal and natural gas were in btu terms.

Its interesting that these prices should coincide with how much production would need to be taken off line because it was “cash negative on an operating basis”—and that this number roughly corresponds to the amount of oil that needs to be taken off the market in order for supply and demand to come into balance.

[ckilmer]

Why Oil Prices Are Headed Below $35 a Barrel
http://www.freerepublic.com/focus/f-chat/3245118/posts

[thackney]

Lots of opinions to be found out there.

I guess that the people that bet with real money know as much.

http://online.wsj.com/mdc/public/page/2_3028.html?category=Energy&subcategory=Petroleum

If they were really sure of $35, those folks could make enough money to never work again, but only if they were right.

[ckilmer]

true. Time will tell.